As I was studying NVIDIA Corporation $NVIDIA Corp(NVDA)$ earnings forecast (reporting after market close 25 May), Coldplay hit-song “Viva la Vida”, translated from Spanish meaning “Long Live Life” played on my Spotify. Fans of the British rock-band would probably know that the song’s lyrics is a metaphor that “even when the worst happens, one can still have hope for the future”. That–in my view–aptly describes the once darling of tech stock, NVDA; despite its share price being pummelled and losing more than half of its value in recent months, there are bright hopes for the future. Let’s see why…
Los Fundamentos (The Fundamentals)
NVDA is expected to post Q1 FY2023 EPS of $1.30 (+41.3% Year-on-Year, YoY) and consensus estimate total revenues of $8.12B (+43.4% YoY). Investors would be looking out for how its top four business segments performed since it last reported in Feb for Q4 FY2022:
- Gaming comprising 44.7% of then total revenues of $7.60B
- Data Center, 42.7%
- Professional Visualisation and AI was 8.5%
- Automotive was 1.6%
Gaming
With NVDA’s GeForce RTX and GeForce GTX GPUs (graphic processor units) for the gaming desktop and laptop PCs, it has dominated the competition, chiefly against AMD's Radeon. NVDA’s share in the gaming market has been consistently above 88% over the past two years (save for a dip 4Q19). This trend is expected to continue, and a positive for NVDA fundamentals as its largest revenue generator currently.
NVDA gaming revenue trend and market share. Source: The Information Network
Data Centre
At 42.7% last quarter and growing, this is likely the key engine of growth for NVDA. Its estimated revenue in Q1 FY2023 is $3.6B (+80% y.o.y from $2.0B) and could overtake the gaming segment. Three semis top-guns duke it out in this arena, Advanced Micro Devices, Intel and NVDA, each with its own data centre “GPU” or DPU and tech roadmap, to retain existing and attract customers to hop onto its platform. NVDA’s upcoming Hopper (4nm) architecture that could come online next year is reported to be the fastest among the trio at 60TFLOPS, faster by 25% than Intel’s Ponte Vecchio.
Professional Visualisation and Artificial Intelligence (AI)
AI has found an unexpected adoption and use case with the expansion of data centers. Explosion of unstructured data, complex workload to visualise, access, store, index and transport big data has forced the rapid adoption of AI for data center operations. NVDA has the foresight to repurpose its GPU, originally for 3D accelerated gaming for parallel processing of data since 2010. Today, it is reaping the benefits in this segment and is the market leader, with 80% share of the AI Processor Market. In terms of revenue, this represents just 8.5% of NVDA last quarterly revenue, implying there is a huge potential to grow in this emerging space, that has estimated CAGR 2021-2026 of 41.9%.
Digitally created CEO Jensen Huang presenting at GTC2021, to showcase its products prowess in AI visualisation and terabyte scale accelerated computing, for Nvidia Omniverse. Source: NVDA
Automotive
While automotive segment contributed just 1.6% of total revenue last quarter, it is a segment NVDA and investors eye for future explosive growth. At GTC2022 (the company’s annual GPU Technology Conference where it showcases latest innovations and interacted with its developers community) in Mar, it announced:
- Its next generation Drive Hyperion–sensors and self-driving toolkit that has a host of car makers including Nio, Li Auto, Xpeng, BYD, Lucid Motors, Polestar, Mercedes, Jaguar, Volvo and Land Rover already onboard, to provide a variety of advanced driving assistance systems (ADAS) and intelligent parking in EVs and ICE vehicles.
- Drive Map, a new mapping platform–powered by NVDA graphics and AI assisted visualisation—with ground truth mapping that it plans to cover 300,000 miles of roadway in North America, Europe and Asia by 2024.
Over medium and longer term, NVDA expects to grow business worth $1 trillion in 5 main segments. Source: NVIDIA GTC2022 presentation
All in all, NVDA has a full-stack platform and products, helping it to maintain market leading position and grow market share in key future industries worth $100 trillion. It sees itself with a $1 trillion opportunity; while gaming segment would reduce to $100B, automotive would grow to $300B and NVDIA AI Enterprise software, Omniverse Enterprise Software and Chips & Systems that power its Data Centre, Professional Visualisation and AI segments, making up the remainder $600B.
Risky Business
There are three key risks areas in NVDA business currently, chiefly macroeconomic, followed by competitors and to small extent cryptocurrency mining.
Macroeconomic factors
NVDA, alongside its key semiconductor peers AMD and INTC have faced quite relentless selloff since Nov 2021 that is steeper and deeper than the major Market Indices. It came as a result of:
- Mounting investors’ concerns over dampening consumers sentiment with soaring inflation, where the later are likely to reduce spending on discretionary gaming and entertainment
- Investors rotating out of high growth stocks that include NVDA to more defensive and high dividend paying companies, as higher rates would increase cost to borrow and finance debts, and decrease returns
- Increasing risks of an economic downturn on the Fed's aggressive rate hikes plan to bring down inflation
- Intensifying Russia-Ukraine conflicts and ensuing sanctions, and lockdowns in several mainland China manufacturing hubs, adding pressure on already-fragile supply chains, that are still recovering from the Covid-19 pandemic.
The good news is the above macroeconomic risks while severe, are temporary and once they are overcome, NVDA would stand to benefit, and resume its hyper growth trajectory with investment dollars returning (maybe with a vengeance).
NVDA and key semis peers vs. SPX and NDX Indices performance from Nov 2021 to present
Competitors and Cryptocurrency mining
While NVDA has done well with its market leading position, it has to continue with high CAPEX and R&D funding to keep ahead of key peers AMD and INTC, and this might affect its growth if there are delays or missteps in its product development. The steep sell-off that also infected the cryptocurrency markets could have some knock-on effects on demand for NVDA GPUs although the company has sought to downplay the effect, or maintained that crypto-mining use of graphics cards is not a sizeable impact on the bottom line.
Las Técnicas (The Technicals)
From longer term Weekly chart, NVDA stock price reached all-time high (ATH) of $346.47 on 22 Nov 2021. Since then, it has endured two waves of steep selling, punctuated by a three-week rally in mid-March that fizzled out, and more selling ensured. As of close of US trading on 24 May, NVDA at $168.98 has lost more than half of its value (—53.38%) in half a year (6-month) since ATH.
Stock price is quite bearish, moving towards a 9-month consolidation zone between $125 to $148, that would likely hold for short and medium term, supported by the 200 MA as well. If this zone were to falter, the trap door is opened for price to drop to lows last seen at the start of 2020 COVID-19 pandemic around $45.17. If NVDA stock price were to reverse its downwards trajectory, it has to climb to over the confluence of 20 and 50 MA above $223.39, for the trend to change to bullish again.
NVDA Weekly Chart
For long and short target prices post earnings, we will examine Daily chart of NVDA
NVDA Daily Chart
Long Live Bulls
Bullish or long scenario could see price reach 20 MA $179.02 (+10.82%) from close of $161.54 on 24 May as first target. In medium time frame, price could retrace back up near 0.5 Fib level and around 50 MA of $217.16 (+34.43%) before moving even higher to above $223.39, which would also signal a change of trend back to bullish.
Short Live Bears
Bearish or short scenario could see price drop to top of previous consolidation zone of $148 (—8.38%). Larger decline, especially if stock price falls together with broad-based Market sell-off or big earnings miss would see price reaching mid-point of consolidation zone around $136 (—15.81%) in short time. Further selling would see price reaching $125, the bottom of the consolidation zone (blue colour in Daily chart).
As Market is coming off weeks of weakness and uncertainty, it is prudent to be conservative, and initiate positions post earnings, where there will be more clarity that NVDA is bullish or bearish, and trade in the direction of price action.
On balance, $NVIDIA Corp(NVDA)$ is certainly a stock I look to go long as I see a long bright future despite its current worst showing due to short term turmoil. So live long to trade it well, short it short term if it fits your trading plan, but Long live Nvidia, Viva la Nvidia!
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